The Curious Case of Australia’s Low Wage Growth

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Quick questions: do you feel wages are growing too slowly? And would you say wage growth is keeping pace with inflation? If you answered no to both questions, you’re in the majority.

Wages are growing at their slowest level in 23 years, at just 2.3%. That might sound reasonable, were it not for the fact that unemployment is edging down.

So how would you go about explaining the increasingly weak relationship between wage growth and unemployment in Australia? Why isn’t the sturdy jobs market reflecting in rising wages? Few people seem to have an answer for this.

It’s no exaggeration to say this is the single biggest paradox facing the Australian economy. We have, on the one hand, employment that’s holding up remarkably well. Whether you look at it in seasonal or trend terms, the jobless rate hovers around 6%. Sure, it could be better, but it’s not bad in the grand scheme of things.

The commodity price rout that’s devastating Australia’s mining sector could have caused more damage than it has. It might still, but the economy’s resilience this year is worthy of note.

And yet, despite strong employment, wage growth is at 20 year lows. What gives?

Economic models suggest this relationship should be much closer than we’re seeing. And quite often it is. Strong unemployment figures typically lead to higher wage growth. In theory, a tighter labour market increases competition, pushing up wage demands in turn. But we’re not seeing any of this reflect in higher wages in Australia.

Just last week, the ABS announced the economy added 60,000 new jobs in October. That pushed the seasonal unemployment rate down to 5.9%. Unemployment remained steady on trend terms. But even on trend terms the number of employed rose by 18,000. So both metrics show that total employment levels rose during October.

Yet this increase in employment isn’t resulting in the kind of wage growth you might expect. When the latest wage price index comes out this Wednesday, markets expect another poor showing. Early estimates suggest wages grew at just 0.6% during the third quarter. Across the year, we’ll likely see wage growing at a weak 2.3%.

Now, 2.3% might sound respectable, but in reality it’s anything but. It puts the current wage growth at levels not seen since Australia’s last recession in the early 1990s…

And yet we’re not in recession. Or at least we’re not yet.

Yet if compare the two eras, there’s little overlap other than slowing wage growth. Back then, weak wage growth cropped up in other areas of the economy too. For instance, employment plunged by over 3%. Not only that, but the economy struggled with double digit unemployment during recession. And yet we’re seeing none of this now. Why?

The mining bust — the key to low wage growth

Well, there’s one key difference between now and then. And it tightly woven into the very thing that’s dragging the rest of the economy down at the moment — the mining bust. From the Australian Broadcasting Corporation:

Unsurprisingly, mining has the weakest wage growth, down 2.7%. However non-mining wages also dropped to 2.5%, less than half the prior trend, and the slowest since the early 1990s.

In part, it is due to a shift in the composition of jobs being created. Mining wages are generally two to three times higher than other industries but the new jobs being created are in areas with far lower average pay.

As [UBS’s Scott Haslem points out] household services — which have been the key driver of jobs for a number of years — have average weekly earnings about one-third the level of mining’.

As Haslem notes, it takes three jobs in household services to replace one lost in mining. Which means employment would need to rise much higher just to drag wage growth up as well. That’s as credible an explanation for this paradox as anything offered to date. The Aussie economy continues to lose high paying jobs across the mining sector. But stronger than expected employment in other sectors is balancing this out.

Knowing this, what does it suggest for the future?

For one, if employment keeps rising, then wages will have to follow at some point too. That’s inevitable, but it’s not likely to happen anytime soon. So we’re likely to see this period of low wage growth drag on for a while yet.

At the same time, the downturn in mining could cost the economy in much bigger ways. Unless we take on more debt as a nation, financing the expansion of non-mining sectors could prove costly. Without the necessary investment in non-mining sectors, the economy is open to the risk of recession.

And that too could be what’s weighing on the labour market. So there’s a psychological element to this wage vs unemployment paradox. It’s likely that many people are prizing job security over wage growth. In an economy that’s possibly on the edge of recession, that’s no small matter.

Mat Spasic,

Contributor, The Daily Reckoning

PS: Low wage growth could be another sign that the economy is inching towards a recession. If 1992 is anything to go by, we should already be in one…

The Daily Reckoning’s Greg Canavan believes we’re on course for its first recession in 23 years. In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.

From falling GDP growth, to declining terms of trade, all signs point to a crash. Trade imbalances have been growing for the better part of a year. Government revenues are down, and household debt is up. It adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. If you act now, you can protect yourself from the fallout of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

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